Closest game I know is RPG World Online (RPGWO). No idea if it still exists or if it's being developped since the last time I tried was like 8 or so years ago. Last time I checked, it had everything you mentionned.
- Full PVP depends on servers, but it's a possibility
- Sandboxy as much as an online RPG can be (think H&H and that's pretty close)
- Survival, rather meh, but you do need to eat and you can freeze during winter
- Crafting and housing are at the core of the game. Only basic materials/tools are available without players. Plus, you can make your own house, village, castle or whatever
- Advanced enviroment interaction, there. Cut tree, replant some, watch them grow. You can raise/lower terrain, pave a road or build a bridge. You can make mine entrance which bring you down a "Z level".
- Free... no idea now. When I used to play you had to make a one time payment. (edit: Oops, actually the game was free to play. The one time payment was to unlock skill cap and get a few more bonus.) Last time I checked there were free servers run by community members and a few years ago the developper released the server files so anyone can make his own world.
Now, I would not actually recommend the game. Unless it changed drastically, the community makes Minecraft fanboys appear like decent likable people. The game is/was made with Visual Basic (IIRC) and has/had horrible perfomance and stability. Graphics are horrible, but that's something many here could deal with.